* Saudi Arabia to have tanks assembled in Ohio, not overseas
* Army sees foreign work offsetting pause in US production
* General Dynamics seeking $181 mln for 33 US tanks in FY13
By Andrea Shalal-Esa
WASHINGTON, May 11 (Reuters) - The U.S. Army says a decision by Saudi Arabia to have Abrams tanks assembled at a Lima, Ohio plant run by General Dynamics Corp will help maintain a low level of production at the plant despite a planned three-year halt in U.S. orders.
General Dynamics is expected to receive $755 million in orders this year to convert old M1A1 tanks owned by Saudi Arabia to a "like new" M1A2S configuration at the Lima plant, instead of shipping kits for assembly in Saudi Arabia, as originally planned, Army officials said.
The company will also receive about $650 million for continued work on 125 kits to modernize M1A1 tanks for Egypt, according to Army officials.
Army Lieutenant Colonel Torry Brennan, product manager for the Abrams tank system, said the Army had carefully analyzed the situation and believed the foreign military sales, and a separate vehicle order from Israel, would provide enough direct labor hours to keep the Lima facility open.
News of Saudi Arabia's decision to have the tanks rebuilt in Ohio comes against the backdrop of intense efforts by General Dynamics, lawmakers, local politicians, unions, and business leaders to reverse the Army's plans to temporarily halt U.S. tank production for the first time since World War Two.
General Dynamics says halting U.S. tank production could endanger over 920 jobs at the Lima facility and thousands more at suppliers around the country. A total of 14,000 direct and indirect jobs are linked to 70-ton tanks, the company says.
Army and Pentagon officials say they need to cut Abrams funding to help achieve $487 billion in required defense spending reductions over the next decade.
They say they will continue to fund up to $400 million in design work on new engines and software upgrades for the next modernization of the tanks to keep some design engineers on the job until production resumes around 2016 or 2017.
"We're not shutting them down. There is going to be a reduction to the rate at which they're building things," said Scott Davis, the Army's program executive officer for ground combat systems.
Company officials estimate that it will cost $1.6 billion to stop U.S. production temporarily, far more than it would cost to keep making a small number of U.S. tanks. That is because of the high cost of storing machines and the likely loss of highly skilled workers, many of whom may retire or move elsewhere to find work.
They say foreign sales already on the books are not sufficient to keep the facility running at an economical rate, and note that finalizing foreign orders can take a long time.
One source familiar with the process said the Saudi order could help achieve the minimum sustaining rate needed for the plant, but negotiations with the Gulf country were not slated to begin until June and such talks often take longer than expected.
The broad outlines of the arms sale now being finalized were first approved by the U.S. government in July 2006.
Ending U.S. tank production at the Lima facility could actually jeopardize foreign orders and increase their cost since the overhead costs of the facility would be spread over fewer orders, said Keith Deters, the General Dynamics official who manages the Lima plant, the Joint Systems Manufacturing Center.
He said the U.S. Marine Corps was also planning to remove a huge, computerized and highly sophisticated $16.5 million machining system that it had paid to install at the facility for production of the amphibious Expeditionary Fighting Vehicle, which was cancelled in January 2011.
General Dynamics officials are still fighting the move, which could also raise the cost of building the Saudi tanks at the plant, and the Namer armored personnel carrier being built for Israel, and say they have even offered to buy the equipment from the Marines.
Army officials first proposed halting Abrams production last year, as part of its fiscal 2012 budget, but lawmakers blocked the move, adding $255 million to continue work converting old A1M1 tank hulls into new A1M2 tanks.
General Dynamics is expected to receive about $126 million of that amount, since some of the funds go for Army expenses and other government-furnished equipment.
No new tanks have been built since the 1990s, and about 75 percent of the old tanks are re-used in the conversion process.
Two U.S. House of Representative committees have already voted to provide $181 million for production of Abrams tanks in the budget for fiscal 2013, which begins in October, but such a measure must still be approved by the full House and the Senate.